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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Govt. goes for US$ 1bn sovereign bond issue

Govt. goes for US$ 1bn sovereign bond issue

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* Bank of America Merrill Lynch, Barclays Capital, Citibank , HSBC to manage issue with People’s Bank
* Analysts: Issue will be a success, but uncertainty prevails over premium after reviews from IMF, Fitch and S&P
* SLDB yields show worrying trend

The government will float a US$ 1 billion international sovereign bond issue later this year, the fifth in a series of Eurodollar bonds issued since 2007 with the country’s first US$ 500 million sovereign bond issue set to mature this October, and four leading foreign banks have been selected as joint managers, bookrunners and underwriters.

"The Central Bank of Sri Lanka (CBSL), on behalf of the government of Sri Lanka

(GOSL), is currently planning an issuance of an international sovereign bond of up to US$ 1,000 million in the international capital market at an appropriate maturity. For this purpose, after evaluation of eight proposals received, CBSL has selected four leading international investment banks, namely Bank of America Merrill Lynch, Barclays Capital, Citibank NA and the Hong Kong and Shanghai Banking Corporation Limited (HSBC) as joint lead managers, bookrunners and underwriters for the proposed sovereign bond issuance," the Central Bank said in a statement yesterday (21).

State-owned banking giant the Bank of Ceylon which co-managed the previous sovereign bond issues, has been left out this time round.

"People’s Bank (another state-controlled bank) has been selected as the co-manager to work with the four joint lead managers on matters relating to the proposed bond issuance," the Central Bank said.

Treasury Secretary Dr. P. B. Jayasundera has said the proceeds of this issue, probably with a ten year maturity, or more, would be used to rollover the maturing US$ 500 million sovereign bond issue and the balance to finance infrastructure development.

Market analysts are uncertain as to the premium the latest bond issue would attract.

Since 2007, premiums have declined along with improved sovereign credit ratings.

"The issue will attract some interest and we believe it would be a success, but as to whether the premium would be lower than previous issues is hard to say," a market analyst said.

However, the International Monetary Fund (IMF), Fitch and Standard and Poor’s have not given very encouraging reviews related to the sovereign bond issue.

Last April the IMF said Sri Lanka could see its risk premium increase on pressures to the balance of payments.

"Despite a higher deficit path and the depreciation of rupee, Sri Lanka’s medium-term debt outlook remains broadly unchanged from that presented in the last Debt Sustainability Analysis. Public debt is still projected to fall to around 65 percent of GDP by 2015 and external debt to just over 40 percent of GDP. Nevertheless, there has been an increase in roll-over risk over the past year. The ratio of reserves to short-term debt (by remaining maturity) has fallen to 70 percent, as a result of the decline in gross reserves in the second half of 2011, and the increase in the current account deficit has inevitably also increased the risk premium on Sri Lanka’s local and foreign currency debt. This increase in rollover risk underscored the need for a credible package of measures to stem the loss of reserves and place the current account on a more sustainable path," an IMF Staff Report on Sri Lanka, released in April, said.

However, the IMF review mission that visited the island earlier this month said the policy measures taken by the government to address the balance of payments problem was showing signs of working, with reserves expected to build up as the year progresses and the economy heading towards a more sustainable growth trajectory.

Fitch Ratings earlier this month said that Sri Lanka’s sovereign debt was the most at risk from the fallout of the European debt crisis.

"Europe’s sovereign debt crisis may pressure ratings of Asian countries such as Sri Lanka, India and Indonesia by disrupting global funding markets. Sri Lanka is most at risk due to its high external-funding needs and weak balance sheet," Fitch has said.

Another international sovereign ratings agency covering Sri Lanka, Standard and Poor’s, in a review published this week said Sri Lanka’s economy and banking sector was at ‘very high risk’.

"All these reviews would have a bearing on how investors behave, but it all boils down to the risk appetite of investors. They will no doubt come and we could see another oversubscription. We may not be able to attract a better premium than previous issues, but it could still be around 6 to 7 percent, which is not bad," a currency dealer said.

Another dealer said the debt crisis in Europe and a still recovering US economy could be in Sri Lanka’s favour.

"Investors are increasingly turning to Asia and other emerging economies, so Sri Lanka has a good chance the Eurodollar bond issue would be a success," he said.

Currency dealers said it was difficult to predict the possible premium for the bond issue.

"Timing is key. A lot will depend on whether markets are risk-on or risk-off on the day the issue is opened," a currency dealer said.

Last July, a US$ 1 billion sovereign bond issue was 7.5 times oversubscribed priced at 6.25 percent. The US$ 1 billion issue in 2010 was 6.3 times oversubscribed also at 6.25 percent.

A sovereign bond issue for US$ 500 million, after the end of the conflict in 2009, was 13 times oversubscribed and was priced at 7.4 percent. This issue was the second since October 2007, which was also for US$ 500 million priced at a much higher rate of 8.25 percent.

Meanwhile, as reported yesterday, a US$ 150 million Sri Lanka Development Bond (SLDB) issue has been floated.

These bonds saw its premium decline since the end of the conflict, except for the last issue in March, which reflected an erosion of confidence to a slight extent.

In March 2012, a three-year SLDB was priced at 4.59 percent and a four-year SLDB was priced at 4.89 percent, higher than for previous issues in 2011 and 2010.

In June 2011, a three year SLDB issue amounting to US$ 103.5 million was been issued at 4.04 percent (LIBOR plus 365 basis points—3.65+0.39) while four year bonds amounting to US$ 23 million have been issued at 4.14 percent (LIBOR plus 375 basis points—3.75+0.39).

Since the end of the war in May 2009, there has been a marked increase in investor sentiments and interest in Sri Lanka’s Development Bond and Sovereign Bond issues.

In March 2009, a Sri Lanka Development Bonds (SLDB) issue for US$ 200 million attracted only US$ 184 million.

However, the first issue after the war in June 2009, an SLDB issue had been oversubscribed by 135 percent, raising US$ 115.8 million of which US$ 50 million was to be rolled over while the balance went in to replenish reserves of the Central Bank after a US$ 125 million loan repayment was made. The offered SLDBs in this issue amounted to US$ 50 million with a two year maturity period at the 6 month LIBOR for US Dollars plus 4.97 per cent.

In August 2009, the Public Debt Department of the Central Bank issued another US$ 190 million Sri Lanka Development Bonds (SLDB) at a rate of LIBOR 6 month rate for US dollars plus 449.8 basis points (4.49 percent) to pay-up maturing bonds amounting to US$ 175 million. This offer was for two year SLDBs for US$ 150 million made on August 6 which was oversubscribed 1.3 times with bids from local and foreign commercial banks amounting to US$ 195.5 billion. The bank accepted US$ 190 million of these bids.

In March 2010, the government accepted US$ 92 million after a US$ 100 million Sri Lanka Development Bond issue was 1.34 times oversubscribed with total bids from local and foreign commercial banks amounting to US$ 134 million. The government accepted US$ 55 million on development bonds with a three year maturity period at about 4.35 percent. US$ 37 million development bonds with a two year maturity period were accepted at about 4.20 percent.

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